British Petroleum: Strategic Analysis

Introduction

The industry of oil and gas is one of the most competitive industries. Players are focused on making improvements to ensure their positions in the market. Although most oil firms have been reporting profits, the business has become more complicated. Oil prices have reached all-time highs and demand for oil products continues to shoot up. These two elements provide opportunities and threats for oil firms to either expand or stall. Moreover, politics and environmental issues continue to affect the industry metrics.

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There are universal strategies used by oil firms to succeed in the industry. These are conventional approaches to ensure sustained development. In addition, oil firms are matured companies led by experienced executives and driven by tested processes. But some oil firms have managed to use different methods. There are oil firms that combine practical strategies with new ideas to realize success. Another noticeable trend reveals that oil firms have been devoting a significant portion of their budget to research and development.

Company Background

British Petroleum (BP) is recognized as one of the biggest energy firms in the industry. The company headquarters is located in London, United Kingdom, and is engaged in the exploration, production, and distribution of oil products. BP caters to customers in more than 100 countries. In addition, BP has exploration interests in 29 countries. Aside from oil production, BP has been engaged in petrochemical manufacturing. The oil firm controls several oil pipes and is involved with partnerships with other oil firms.

But BP has been regarded as one of the worst firms in terms of protecting the environment and human rights. BP has been involved in violations of laws about the environment. BP, however, has been active in changing such reputation and contribute. At present, the company has been involved in the production of solar panels. In addition, BP has been spending a portion of the R&D fund to improve energy efficiency. BP products are also reinvented to ensure low emission of harmful chemicals

Company Performance

In 2007, BP has amassed revenue of $291 billion. This figure is higher than the previous year, which is at $274 billion. But the profit in 2007 was down to $21 billion from $22 billion in 2006. The majority of the revenues were derived from exploration and production. The other business segments include refining and marketing and gas, power, and renewable. In terms of capital expenditures, BP has been active in all business divisions. In 2007, the total capital outlay reached $20.6 billion from $17.2 billion in 2006. The company has allocated $8 billion for research of other methods of fuel (2007 Annual Report, 2008).

BP has been concerned with the level of safety in the operation facilities. The firm implemented the Process Safety Enhancement Programme to guide all entities within the company. As part of the firm’s social involvement, BP has donated to various charities. The company has been dedicated to uplifting its reputation by performing efficiently. BP intends to overcome some of the major challenges in the industry. But these roadblocks provide potential maturity in BP’s processes and methods.

Value Chain

The idea of adding value to products and services is clustered into primary and secondary activities (Porter, 1985). The primary activities include the process from resource selection to the finished products. To enhance BP’s position, the company has been aggressive in exploring extensive oil basin sources. There are two strategies used by BP when it comes to handling the supply. The company ensures that exploration projects are large enough to sustain the needed demand in certain markets.

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Supplier Relationship

In any value chain, the role of suppliers is often highlighted. The power of these suppliers contributes to both success and failures of firms (McGahan, 2004). There are two important aspects that BP maintains about the firm’s suppliers. The first involves the geographical locations of the suppliers. BP ensures that the delivery of supplies to the company is fast. The next policy allows BP to establish long-term relationships with suppliers. The company also builds a pool of suppliers to expand alternatives.

Operational Efficiency

Operational integrity is an important aspect that the firm maintains. BP has successfully reduced incidents of spills and operational problems. The efficiency of operations is viewed in the greenhouse gas emission reduction, which is targeted at 7 billion tonnes in 6 years. The increase in production expense 23.8 billion in 2006 to 25.9 billion in 2007 is attributed to the re-evaluation processes that seek to provide long-term production efficiency.

Outbound Logistics

The delivery of BP products to the market is a crucial component of the operations. The company has been improving in this aspect significantly. At present, BP has installed 53 vessels, which are all double-hulled. Moreover, BP will continue to commission top-notch ship service providers to carry the firm’s products. As a policy, all delivery processes are maintained by BP’s ship vetting policy. This system is constantly monitored as enhanced with appropriate certifications.

Marketing Initiatives

Building a reputation of quality in the perception of clients is valuable to firms (Trout and Rivkin, 1996). When BP acquired Amoco, the company insisted on retaining Amoco’s brand instead of using BP. This allowed BP to maintain the customers loyal to Amoco. BP is known for the company’s Helios advertising campaign. Through this initiative, BP has increased brand awareness in the US by 11% and customer preference by 3%. The Company is also involved in charitable events to emphasize corporate responsibility.

Services

Aside from the products, BP implements extensive services to customers. In BP gas stations, personnel is trained to assist in transactions and queries. Moreover, BP has installed a communication network to support the firm’s activities. Customer retention is an important aspect that is targeted by the company. This is done through proper services augmented to the products made and distributed by BP.

Infrastructure Management

In 2007, the company spent approximately $6 billion to install an integrity management system. This is designed to maintain infrastructures and push for plant improvements. BP has been actively pursuing the betterment of the health and safety standards of the company. The firm conducts annual tests with some government agencies to determine the level of hazards present in the workplace. The process involves the maintenance of property and equipment.

Workforce Enhancement

Human resources are important components that add value to products and services provided by BP. Barney (1991) pointed out that the employees of the company are the hardest to imitate. The company has been active in promoting equal training among top managers and local employees. Aside from training, BP provides ample compensation to firm personnel. Proper medical benefits and other perks are accorded to performers. BP has established work areas that conform to human standards and promote safety. Aside from expert managers, BP has installed systems to monitor the personnel status.

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Research and Development

BP is poised to spend more on the firm’s R&D projects. In 2007, tangible assets have increased t0 $6.6 billion as compared to the $5.2 billion value in 2006. The trends also suggest that BP is expected to increase capital expenditures in 2008. R&D is a vital firm component that will allow BP to gain the needed competitive edge. At present, the R&D projects are more focused on developing efficient fuel and other energy sources.

Procurement

The procurement process allows BP to reduce the time needed to produce products. In 2007, total BP purchases were valued at $200 billion. The extent of this procurement shows the importance of the system. In addition property, plant, and equipment increase to $97 billion in 2007 from $91 billion in 2006. The procurement scheme used by BP is based on the company’s decision to improve efficiency. Hence waste in the process is eliminated and the supplies procured as used to their maximum potentials.

Strategic Analysis

The strategies of BP define the company’s processes and functions. The method in which these strategies are devised is critical to the success of the firm. Mitzberg (1989) explained that strategies are built on the goals and culture of firms. Strategies are mostly long-term and require time to be perfected. But BP has other short-term initiatives to take advantage of opportunities (Shank, Speigel, and Escher, 2005). The balance between the two is essential in the success of the company. There is the danger that BP will experience losing other chances to grow. The manifestation of a particular strategy has some opportunity cost.

Production Efficiency

The process of oil production results in some valuable wastes. There are resources thrown away instead of becoming finished products. The quality of production processes is important inefficiency. Each stage of production has to limit waste and provide optimum results (Deming, 1983). This is the ultimate goal of BP. Since oil is a rare commodity, making the most out of the limited resource is a priority. This involves improvements in facilities, maintenance of pipes, and improvement of distribution processes.

In other industries, firms cut their processes to limit the use of resources. There are processes perceived as redundant and need to be reduced. In addition, waste is experienced when personnel is untrained and equipment used is below par. Emphasis on efficiency, however, has some trade-offs. This process will push BP to spend more than usual. Based on BP’s recent earnings report, the company has increased its expenditures significantly. When the cost of efficiency is higher than the benefits, then BP needs to make more evaluations of strategies used to boost production efficiency.

Diversification

BP plans to exist as a company that provides a wide range of products and services. Two of the most unique products distributed by BP include petrochemicals and solar cells. The former is a highly demanded commodity used in several other industries. The latter is a product that introduces BP in the alternative energy market. Both products are developed to minimize BP’s dependency on oil sales.

Aside from a source of revenue, these other products improve BP’s marketing portfolio. For instance, promoters of solar energy commend the firm’s solar cells. BP, however, needs to determine the sacrifices needs for these products to grow. Another form of diversification involves BP in the polyester business. The company is currently is in partnership with China’s Zhuhai which is a polyester-making company.

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Issues and Challenges

The operations of BP still have room to improve. As stated in earlier discussions, the operational expenses of the company are still high. This means that at some point, targets on operational efficiency are missed. There needs to be a positive trend regarding the decline in operational expenditures. Moreover, exploration projects are decreased significantly in 2007. The exploration expense for the firm in 2006 is $1 billion as compared to the value in 2007, which is at $756 million. In a competitive industry, this lack of emphasis will affect the long-term growth of the company.

BP has recognized that diversification is important. Hence the company moved to other businesses such as alternative power and textiles. In doing so, BP has reduced focus on the firm’s staple source of income. Oil products are still seen as the most important product of the company. BP’s focus on diversification can lead to the decay of the firm’s reputation.

Conclusion

Overall, the year 2007 has been great for BP. Highlights include an increase in revenue and improvements in other financial indicators. To add value to BP products, several activities were implemented. The most relevant included the Helios marketing, research and development, and emphasis on safety. In addition, BP has been involved in massive personnel training and continuous building of supplier partnerships. In terms of strategy, the focus of BP is on other products. At present, BP has already explored the alternative energy market and the textile industry.

References

Barney, J., (1991), Journal of Management, “Firm resources and sustained competitive advantage”

Deming, W. E., (1986).], Out of Crisis, Cambridge: MIT Centre for Advanced Engineering.

McGahan, A., (2004), How Industries Evolve – Principles of Achieving and Sustaining Superior Performance, Boston: Harvard Business School Press.

Mintzberg, H., (1989), Mintzberg on Management, London: Free Press.

Porter, M., (1985), Competitive Advantage: Creating and Sustaining Superior Performance, New York: Free Press.

Sims, R., (2002), Organizational Success through Effective Human Resources Management, Westport, Connecticut: Quorum Books.

Shank, J.K., Spiegel, E.A. and Escher, A., (2005), “Strategic Value Analysis for Competitive Advantage: An Illustration From the Petroleum Industry”.

Trout, J. and Rivkin, S., (1996), The New Positioning: The Latest on the World’s Number 1 Business Strategy, New York: McGraw Hill.

British Petroleum, (2008), 2007 Annual Report, Web.

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